East Coast on Transformation Investments: Union Pacific, Colfax & WABCO (Q4 Letter) ~ market folly

Thursday, January 24, 2013

East Coast on Transformation Investments: Union Pacific, Colfax & WABCO (Q4 Letter)

Christopher Begg's East Coast Asset Management is out with their Q4 letter.  Last time, we highlighted their letter on investment process and this time around, they focus on examples of 'transformations' that they invest in.

East Coast defines transformations as businesses that often have average or below-average economics and they are focused on seeking the cause that will produce a 'meaningful inflection point of change' on the economics of the business.

Begg writes,

"Our investment process becomes considerably more important when we try to ascertain if a business is truly transforming and emerging toward greatness.  Every business is either getting better or worse with change, and we feel the market tends to value businesses on a one-point perspective by inferring the status quo.  This can lead to mispricings for those transformations that we identify prior to change agents being reflected on businesses' financial statements."

3 Types of Transformations & Investment Examples

They've broken this down into 3 categories:

Secular:  Prolonged positive inflection point in a business' economics (often after industry consolidation).  Examples that East Coast owns include Union Pacific (UNP) and Burlington Northern Santa Fe (via Berkshire Hathaway ~ BRK.B)

Systemic: A business that adopts new companywide operational and cultural methods that drive change.  Ex: Colfax Corp (CFX), which East Coast purchased in the fourth quarter.

Separation: Often a result of spin-offs, these businesses weren't operating at full potential within the context of a larger organization.  Ex: WABCO (WBC), which they also purchased in Q4.

To read East Coast's thesis summary on each security, read their Q4 letter embedded below:


For more from this manager, head to East Coast's thoughts on what defines a great business and a look at IBM.

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